Case Law Details
Re Poonawalla Aviation Private Limited (AAR) – Clause 7 speaks of India limiting its taxation at source on interest dealt with in Article 12 of the Convention by providing a lower rate or by providing a scope more restricted than the rate or scope provided for in the Convention, the same rate or scope shall also apply to the Convention in question. A question of lowering of rates is not involved here. What is contended is that the scope of taxation of interest has been further restricted by taking out of the purview of taxation, even loans or credits insured by Banque Francaise du Commerce Exteriur or COFACE. Going strictly by the other treaties relied on the restriction is only on taxing the interest income insured by Banque Francaise. No entity similar to COFACE is referred to in the treaties with Canada, Hungary and Ireland. It is seen that COFACE is a body incorporated under the laws of France, acting on behalf of the French State in the export credit insurance. It appears, therefore, to be a body created for extending insurance on behalf of the French State, somewhat akin to Export Import Bank of India.
BEFORE THE AUTHORITY FOR ADVANCE RULINGS
(INCOME TAX), NEW DELHI
5th December, 2011
PRESENT
Mr Justice P.K. Balasubramanyan (Chairman) Mr. V.K. Shridhar (Member)
A.A.R. No. 953 of 2010
Name & address of the applicant : Poonawalla Aviation Private Limited,
Commissioner Concerned : Commissioner of Income-tax-II, Pune
R U L I N G
[By Justice P.K. Balasubramanyan)
The applicant, a company incorporated in India entered into an agreement dated 13.8.2008 for purchase of an aircraft from Dassault Aviation SA, a company incorporated in France. That agreement was amended on 20.8.2008 and again on 23.6.2009. On 17.3.2009, the Compagnie Francaise d’Assurance pour le Commerce Exterieur (‘COFACE’ hereafter) agreed to ensure the credit facility to be extended by the seller. As per amended agreement, the price payable was $ 41,000,000. Out of that amount, Dassault, the seller, agreed to provide as export credit facility a sum of $ 30,010400. Out of that amount, the credit insurance premium of $ 510400 was to be paid to COFACE towards insurance premium. The amount loaned, or in respect of which the credit facility was extended was to be repaid in six-monthly instalments commencing from 17.1.2010 and ending on 17.7.2016. The instalment inclusive of interest payable on 17.1.2010 was $ 2502140,92. Two sets of 14 promissory notes, one set each for each instalment payable, covering the principal and the interest separately were executed by the applicant in favour of Dassult. On 15.12.2009 all the promissory notes were irrevocably and unconditionally assigned by Dassault to BNP Paribas, France. The present application under section 245Q(1) of the Income-tax Act, 1961 („the Act hereinafter) was thereafter filed by the applicant on 11.6.2010 seeking an advance ruling wanting to know whether it had any obligation to withhold tax on the interest payable on this and the succeeding instalments under section 195 of the Act in view of the relevant provision contained in the Double Taxation Avodance Conven on („DTAC‟) entered into by India and France. This Authority admitted the application under section 245R(2) of the Act for giving a ruling on the following questions:
3. (a) Based on the answers to question (1) above, and in view of the facts as stated in Attachment III, and also in light of the declaration provided by Dassault that it does not have a permanent establishment in India in terms of Article 5 of the Treaty (attachment IX), whether the applicant would require to deduct tax at source under section 195(2) of the Act on the payment of interest to Dassault, if yes at what rate?
(b) Based on the answers to question (2) above, and in view of the facts as stated in Attachment III, and also in light of the fact the interest payment by applicant is not in connection with debt that is effectively connected to a PE of BNP in India, whether the applicant would require to deduct tax at source under section 195(2) of the Act on the payment of interest to BNP, if yes at what rate?
2. According to the applicant, in view of the insurance of credit facility provided by COFACE, the payment of interest payable to Dassault and subsequently to BNP Paribas was not taxable in India in view of Article 12.3(b) of the DTAC between India and France. The fact that the promissory notes executed in favour of Dassault were assigned to BNP Paribas would not make any difference. The payment would continue to be non-taxable and there was no obligation on the applicant to withhold tax thereon in terms of section 195 of the Act. It is to be noticed that the questions relate only to the payment of interest and not to the repayment of the principal debt in instalments.
5. A further submission was made by the applicant pleading that Article 12.3 (b) of the Treaty between India and France applied and even if paragraph 3(b) did not apply, the applicant was entitled to the benefit of the Most Favoured Nation clause contained in clause 7 of the protocol to India-France Convention entered into on 29.9.1992. In view of the fact that India had entered into Double Taxation Avoidance Convention with other countries after 1.9.1989, the crucial date as per the India-France protocol, even insurance of the credit extended by COFACE was sufficient to enable the applicant to claim the benefit under Article 12.3(b) of the DTAC. It is pointed out that in treaties entered into with Canada on 6.5.1997, with Hungary on 4.3.2005, and with Ireland on 26.12.2001, insurance of credit facility has also been brought within the purview of relief against taxation with India. The same position would govern the India-Franch Treaty also in view of the Most Favoured Nation Clause. So, in any event, the application of Article 12.3 (b) cannot be kept out. Article 12 of the Convention between India and France to the extent relevant reads:
Article 12 – Interest
3. Notwithstanding the provisions of paragraph 2:
(a) Interest arising in a Contracting State shall be exempt from tax in that Contracting State provided it is derived and beneficially owned by:
(i) the Government, a political sub-division or local authority of the other Contracting State; or
(ii) the “Reserve Bank of India” in the case of India and the “Banque de France” (and Agence Francaise de Development) in the case of France; or
(iii) any other institution as may be agreed from time to time between the competent authorities of the Contracting States;
(b) interest arising in a Contracting State shall be exempt from tax in that Contracting State if it is beneficially owned by a resident of the other Contracting State and is derived in connection with a loan or credit extended or endorsed by:
(i) in the case of France, the Banque Francaise due Commerce Exteriur, or the Compagnie Francaise d’ Assurance pour le Commerce Exterieur (COFACE);
(ii) in the case of India, the Export-Import Bank of India;
(iii) any institution of the other Contracting State in charge of the public financing of external trade.
It is the case of the applicant that the credit facility extended by Dassult to it being insured by COFACE, would amount to it being a loan or credit extended or endorsed by it within the meaning of clause (b) (i) of paragraph 3 of Article 12 of the Convention. The contention of the revenue is that mere extending of an insurance would not amount to extending or endorsing a loan within the meaning of clause (b)(i) of paragraph 3 of Article 12. According to the applicant, the expression „endorseis wide enough to include the extending of an insurance for the credit by COFACE.
8. It is argued that going by the French version of the Convention, when a loan or credit is granted or guaranteed by COFACE, it would come within paragraph 3(b) of Article 12. COFACE has not guaranteed the repayment of the loan by the applicant. It has only engaged itself to pay an agreed sum to Dassault on the happening of a certain event, the event of Dassault incurring a loss on not being able to recover the loan or credit it has extended to the applicant. A contract of guarantee is a tripartite contract. It is only bilateral in this case, between COFACE and the Dassault. The reliance on so-called literal translation of the French
version does not advance the case of the applicant.
13. It is then argued that a protocol was signed by India and France on 29.9.1992 by which the benefit of the Most Favoured Nation clause has been extended to this Convention and based on it, insurance of the credit by COFACE is sufficient to exempt the interest paid in this case from taxation in India. Clause 7 of the Protocol to the Covenant is relied upon.
14. The Protocol starts by saying that at the time of signing the Convention the two parties have agreed on the provisions set out therein which were to form “an integral part of the Convention.”Clause 7 which is relied on reads:
“7. In respect of articles 11 (dividends), 12 (Interest) and 13 (royalties, fee for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol singed after 1.9.1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of that income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.”
It is submitted that in Treaties India had entered into with Canada, Hungary and Ireland exemption from taxation for interest relating to a loan or credit is available not only in respect of loans or credits made, guaranteed or extended, but also in respect of loans insured by institutions corresponding to COFACE in France. The corresponding provision in the India-Canada Convention reads:
“(b)(i) interest arising in India and paid to a resident of Canada shall be taxable only in Canada if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Export Development Corporation ”
The Convention with Hungary and Ireland include loans or credits insured by the Hungarian Exim Bank and the Central Bank of Ireland respectively. One aspect to be noted is that in the case of the Conventions relied on, the benefit is available only in respect of one institution, namely, the Export Development Corporation in the case of Canada, the Hungarian Exim Bank in the case of Hungary and the Central Bank of Ireland in the case of Ireland whereas in respect of France, it covers loans or credits extended or endorsed by two institutions, the Banque Francaise du Commerce Exteriur or COFACE.
17. Clause 7 speaks of India limiting its taxation at source on interest dealt with in Article 12 of the Convention by providing a lower rate or by providing a scope more restricted than the rate or scope provided for in the Convention, the same rate or scope shall also apply to the Convention in question. A question of lowering of rates is not involved here. What is contended is that the scope of taxation of interest has been further restricted by taking out of the purview of taxation, even loans or credits insured by Banque Francaise du Commerce Exteriur or COFACE. Going strictly by the other treaties relied on the restriction is only on taxing the interest income insured by Banque Francaise. No entity similar to COFACE is referred to in the treaties with Canada, Hungary and Ireland. It is seen that COFACE is a body incorporated under the laws of France, acting on behalf of the French State in the export credit insurance. It appears, therefore, to be a body created for extending insurance on behalf of the French State, somewhat akin to Export Import Bank of India.
(V.K. Shridhar) (P.K. Balasubramanyan)
Member Chairman